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Our Topic Is: The Consequences of Bank Mergers. Julie Schicktanz Kami Sevier Ian Bray Vesa White. 8 December 2009. Agenda. Why Do Banks Merge? Case Study Social/ Economic Consequences Conclusion. Why Do Banks Merge?. Stay Competitive Increase Accounting Profitability . Stay Competitive.

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our topic is the consequences of bank mergers

Our Topic Is: The Consequences of Bank Mergers

Julie SchicktanzKami SevierIan BrayVesa White

8 December 2009

agenda
Agenda
  • Why Do Banks Merge?
  • Case Study
  • Social/ Economic Consequences
  • Conclusion
why do banks merge
Why Do Banks Merge?
  • Stay Competitive
  • Increase Accounting Profitability
stay competitive
Stay Competitive
  • Other Competitive Pressures:
    • Charles Schwab
    • Boeing Capital Corporation
  • Bank’s Solution:
    • Increase size to compete
increase accounting profitability
Increase Accounting Profitability
  • Bank’s Solution:
    • Increase size to increase customer base

Positive Network Externality

Increased Customer Base

Increased Bank Services

wells fargo wachovia merger case study
Wells Fargo & Wachovia Merger Case Study
  • Wells Fargo and Wachovia merged on December 31, 2008.
  • Effect of the Merger on WFC’s stock price
pros and cons of merger
Pros and Cons of Merger
  • Pros-
    • More assets and locations
    • One of the 3 biggest banks in US in terms of wealth
  • Cons-
    • Short-run declining stock price
social economic consequences
Social & Economic Consequences
  • Small Banks Today
    • “Old” way of Banking
  • Big Banks today
    • “New” way of Banking
social economic consequences10
Social & Economic Consequences
  • Big Banks are Less Willing to Cater to Small Businesses and Low Income Individuals
    • 1) “low-touch” Banking
    • 2) High Fees
    • 3)Availability of Credit
social economic consequences11
Social & Economic Consequences
  • What if ONE Large Bank Failed?
    • Big Banks Require a Large Sum of Money to Bail Out
      • Taxpayers
    • Interconnectedness of Banks
      • Failure of Entire Banking System
too big to fail
“Too Big to Fail”
  • What dose this phrase mean?
  • Which banks can and cant fail, and when the banks are left to fail what are the repercussions?
  • When the government decides a bank is too big to fail where dose the money come from to bail them out and does this pose a threat of moral hazard?
the glass seagall act
The Glass-Seagall Act
  • After the stock market crash of 1929 congress decided to pass the Glass-Seagall act
  • This Act separated Investment and commercial banking
  • This law was repealed by Bill Clinton in 1999
the housing crisis
The Housing Crisis
  • In 2003 the fed dropped the interest rate encouraging risky borrowers to become home owners
  • The availability of credit helped drive up housing prices and by late 2006 the entire market was over priced.
  • Borrowers defaulted on their homes and left the bank to foreclose at a fraction of the amount owed on the properties
bank expansion
Bank Expansion
  • Smaller banks began to struggle and fail and were inevitably bought up by bigger banks
  • These big banks bundled in thousands of toxic assets in with their good ones.
  • This bundling caused big productive banks to go under.
solution
Solution
  • Republicans put forth a proposal that would add a chapter to the bankruptcy code that deals with large, troubled financial institutions.
  • Democrats are also drafting a bill where failing institutions can be dismantled through government intervention without the help of taxpayers’ money. This bill is expected to put a cap on bailouts at 2 billion dollars
conclusion we learned
Conclusion: We learned…
  • Banks Merge Because
    • Profitability
    • Competition
  • When Banks Merge
    • Stocks Generally Decrease
    • Small Businesses Receive Fewer Loans
  • When Banks Do Fail, Taxpayers Foot the Bill